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What anyone would think can change dramatically. Ron Paul, through his Fed audit bill, is trying to get his colleagues, and the American people, to change what and how they think about the central bank. Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, told a Massachusetts town hall meeting in August that he believes the House will indeed pass H.R. 1207 in October.
All the anti-Fed agitation we’ve seen in the last couple of years may eventually feel like a footnote if the current binge of monetary expansion creates something Americans haven’t seen for a quarter century: substantial and painful inflation in the consumer price index. For now, Bernanke is trying to assure Congress and the public that the Fed governors are skilled and knowledgeable enough to know when they need to “neutralize” the new money by, for example, selling bonds to the market and essentially swallowing the money back up before prices spike.
But the Fed doesn’t have a stellar track record of timing monetary shifts with scientific precision, and any actions that rein in inflation, thereby cutting off the short-term stimulative effect that governments love, are bound to be politically dangerous both to the Fed and to the president who appoints its overseers. As Bernanke admitted at his televised town hall meeting in July, the Fed can maintain its independence only if it can “show that we are producing good results,” and while he added lip service to independence, the people he must show those results to are Congress and the administration. Though he was appointed to a new four-year term in August, if he flubs inflation, Bernanke will be facing a whole new wave of political attacks.
More generally, the Fed’s independence is threatened by a growing understanding that the Austrian interpretation of central banking’s risks might be correct: Keeping interest rates too low for too long can precipitate severe economic busts. “It’s hard to imagine the little spark that can make big change,” says Austrian business cycle theorist Steve Horwitz, “but it can happen if the drumbeat stays going. The Fed was created by Congress, so we won’t get major change until members of Congress perceive their constituents or people with political, cultural, and social power saying there’s something really seriously wrong here.”
Senior Editor Brian Doherty (firstname.lastname@example.org) is the author of This is Burning Man (BenBella), Radicals for Capitalism (PublicAffairs), and Gun Control on Trial (Cato Institute).